BUL 850 HOU$ING. affordability in IDAHO to Luke V. Erickson, Garth Taylor, Benjamin Eborn, Sarah Howe, Sue Traver, & Stephen Cooke

Transcription

1 BUL 850 HOU$ING affordability in IDAHO 1979 to 2000 Luke V. Erickson, Garth Taylor, Benjamin Eborn, Sarah Howe, Sue Traver, & Stephen Cooke

2 TABLE OF CONTENTS Executive Summary...3 Background...3 Index Calculation...3 Understanding Affordability...4 Data Definitions...4 HOUSE VALUES VS. INCOME: COUNTY AND STATE COMPARISONS...5 Housing...5 Table 1. Change in median housing value from 1980 to 2000, in Idaho counties, by region...5 Table 2. Change in median income from 1979 to 2000, in Idaho counties, by region...5 Income...6 HOUSING AFFORDABILITY INDEX...6 Results...7 Figure 1A. Housing affordability index of least to most affordable counties: Idaho Figure 1B. Housing affordability index of least to most affordable counties: Idaho Figure 1C. Housing affordability index of least to most affordable counties: Idaho Time Snapshots...10 Figure 2A. Annual housing cost as a percentage of annual median household income by county: Idaho 1980 (i=12.66%) i = interest rate...10 Role of Home Prices in the Index...13 Role of Income Levels in the Index...13 Role of Interest Rates and Fees...13 BEYOND THE INDEX...14 Nontraditional Lending...14 Personal Debt...14 Income Volatility...15 Starter Homes...15 Table 3. Starter home prices and income qualifications for selected Idaho communities, CONCLUSION WHAT CAN BE LEARNED...16 Endnotes...17 APPENDIX...18 Appendix Table 1. Idaho median household income and median home value by county: ; ; Appendix Table 2. Idaho housing affordability index of median household income and median home values: ; ; Appendix Figure 1. Idaho housing affordability index map, Author Notes...20 Figure 2B. Annual housing cost as a percentage of annual median household income by county: Idaho 1990 (i=10.32%) i = interest rate...11 Figure 2C. Annual housing cost as a percentage of annual median household income by county: Idaho 2000 (i=7.88%) i = interest rate

3 Executive Summary Housing in Idaho can range from unprecedented growth to negative appreciation. While county and city officials try to balance community growth against a struggle to maintain affordable housing, they also must gauge the effects on homeowners of rising property taxes. The authors have adapted an index of housing affordability to provide a view of housing values and income levels in Idaho s 44 counties at three separate points of time over a period from 1979 to Background Idaho s size, diverse landscape, and local economies lay the groundwork for an array of statewide housing affordability issues. Understanding the situation proves challenging. It is common for some communities to experience unprecedented housing growth while others suffer an economic downturn, accompanied by low or falling housing prices. Community growth and housing price appreciation often are considered positive. Yet low- and moderateincome home buyers sometimes struggle to afford decent homes. Even established homeowners are not immune to affordability issues. Rapidly increasing property values can drive up property taxes until even a fully paid for home becomes unaffordable. Only a few decades ago, strict lending standards existed. Housing affordability was directly influenced by approval or rejection of loan applications. This standard of affordability no longer applies. For purposes of this bulletin, the authors have defined housing as affordable when the annual payments of principle and interest on a home are less than or equal to 25% of household income. For mechanics behind this definition, see the Index Calculation at right. For low-income residents, purchasing a home has always been difficult. As the gap between wages and housing prices in many Idaho communities has widened, the problem of affordable housing has begun to affect middle-income residents, leaving only the highest income households able to afford available housing. The lack of affordable housing causes direct problems for low- and middle-income buyers and can have indirect consequences in communities as well. The explosion in home prices in some communities has outpaced the incomes of many essential individuals such as teachers, nurses, police officers, clerical staff, service workers, and vital middle-income wage earners. Local leaders and business owners concerned with providing adequate housing for their citizens and employees struggle when key jobs go unfilled because people cannot afford housing. This jeop- Index Calculation Housing affordability index calculation: Index = Where: RI = Monthly Household Income (HI) Required Income (RI) to Qualify for a Conventional Purchase Mortgage Required Monthly Mortgage Payment x 12 Qualifying Ratio (QR) How do property taxes and insurance costs affect the Qualifying Ratio? Property taxes and insurance rates vary significantly from area to area. Loan underwriting standards require that the debt-to-income ratio for a prospective home buyer not exceed a certain level or percentage. To qualify for the mortgage loan, the monthly mortgage payment plus escrow for property taxes and insurance cannot exceed a stipulated percentage (Qualifying Ratio) of the borrower s gross monthly income. The Qualifying Ratio (QR) establishes the maximum percentage of gross monthly income allocable to monthly housing costs. If property taxes and insurance are included, the QR would be a greater percentage of monthly income. Not including property taxes and insurance lowers the applicable QR to determine the borrower s suitability. Following the lead of conventional mortgage underwriting standards and the QR applied by the National Association of Realtors (NAR) and others, we will apply a 25% QR directly to the mortgage payment alone to estimate income required for a buyer to qualify for a conventional, 80% home loan. Source: Texas Housing Affordability Index (THAI) of the Real Estate Center at Texas A&M 3

4 ardizes businesses, social structures, and public services necessary for the growth and well-being of the community. Workers priced out of the housing market either must commute long distances or seek employment in other communities. When families are unable to reside in the community yet continue to work there, the tax burden for public services such as education, fire, and police are shifted to the bedroom community. The benefits such as sales and associated business taxes are generated in the working community. A prime example is Teton County, Idaho, which serves as a bedroom community for Teton County, Wyoming, where purchasing a home is not viable for any but the wealthy. Sales and business property taxes are generated in Wyoming, while the tax burden for education, community services (sewer, water, police, and fire) and infrastructure (roads, sewer, and recreation facilities) falls in Idaho. When employees make costly, time-consuming commutes or work multiple jobs, families and communities often bear the cost. Children spend longer hours in daycare, family and leisure time are reduced, and volunteer time is restricted or split between communities. Understanding Affordability The goal of this research is to better understand Idaho s housing market and to identify for community leaders the key elements of housing affordability as they work to address housing issues in their communities. To accomplish this we focused on three main objectives: 1. Construct an index of housing affordability as a way to compare and contrast housing affordability over time and across Idaho communities. 2. Discuss other factors influencing housing affordability not directly accounted for in the index. 3. Analyze affordability of a typical starter home by wage level in Idaho counties and select cities. To help analyze and pinpoint communities facing or potentially facing affordability crises, we have constructed a simple housing affordability index for each of Idaho s 44 counties. This index addresses which Idaho communities are relatively affordable or unaffordable. It also shows where housing in Idaho has become more or less affordable over time. We modeled the index after the nationally recognized Texas Housing Affordability Index. It combines, in one convenient number, both sides of the housing affordability problem a family s ability to pay for housing, and local housing prices. The index allows a comparison of housing affordability among Idaho communities and with state of Idaho and national averages. Data Definitions Real median household income is the level of income at which half the population has lower income and half has higher income. Here, we provide information on real median household income, which means the data have been adjusted for inflation (1989 dollars). Source: 1979: U.S. Bureau of the Census, Census of Population and Housing, USA Counties 1998, ( usasel.pl) 1989 and 1999: U.S. Bureau of the Census, Census of Population and Housing, American Factfinder, ( : U.S. Bureau of the Census, Small Area Income and Poverty Estimates, ( county.html) Effective interest rate reflects the amortization of initial fees and charges. The effective rate is reported by the Federal Housing Finance Board s (FHFB) Monthly Survey of Rates and Terms on Conventional, Single-Family Non-farm Mortgage Loans for the state of Idaho. Source: Federal Housing Finance Board ( Default.aspx?Page=53) Real median home price is the value of owner occupied housing according to the census respondent's estimate of how much the property (house and lot, mobile home and lot, or condominium unit) would sell for if it were for sale. The median value is the level at which half the housing units have a higher value and half have a lower value. Here, we present the real median value, which means the data have been adjusted for inflation (1990 dollars). Source: 1980: U.S. Bureau of the Census, Census of Population and Housing, USA Counties 1998, ( usasel.pl) 1990: U.S. Bureau of the Census, Census of Population and Housing, ( 2000: U.S. Bureau of the Census, Demographic Profiles, ( 4

5 HOUSE VALUES VS. INCOME: COUNTY AND STATE COMPARISONS Housing The first key variable in a study of housing affordability is the cost of housing. For this, we used median home value by county, state, and nation. According to the Census Bureau, median home values are the census respondent's estimate of how much their property, generally defined as the price for which a house and lot, mobile home and lot, or condominium unit, would sell. The median value is the level at which half of the housing units have a higher value and half have a lower value (see Data Definitions on page 4). For example, the real 1 median home value in the U.S. was $112,114 in 1980 and increased to $135,655 by 2000, a 21% rise. In Idaho, the real median home value in 1980 was $108,795. By 2000, the median rose to $120,570 an increase of close to 11% (see Appendix Table 1). Idaho housing continues to be more reasonably priced than the average U.S. home. In this 20-year period, Idaho communities associated with prime recreation or tourist areas experienced the steepest increase in home values. Between 1980 and 2000, Blaine County, known as an upscale resort area, experienced the largest increase in real median home values as prices rose from $172,000 to $328,000. This is an increase of more than 90%, or an average annual growth rate of 3.3%. Teton County, Idaho, which is part of the Census Bureau defined Micropolitan Statistical Area of Jackson, Wyoming, an Table 1. Change in median housing value from 1980 to 2000, in Idaho counties, by region. Northern region Western region Central region Eastern region Bonner 28.7% Boise 35.2% Blaine 90.9% Teton 72.5% Benewah 21.7% Washington 28.5% Camas 26.1% Oneida 32.6% Latah 21.0% Adams 26.8% Lincoln 19.2% Franklin 15.1% Boundary 18.6% Valley 26.3% Jerome 14.9% Clark 14.5% Shoshone 14.7% Owyhee 20.7% Gooding 12.2% Jefferson 4.5% Lewis 14.1% Payette 18.5% Custer 11.8% Fremont 3.0% Nez Perce 11.5% Gem 17.1% Lemhi 11.1% Power 2.1% Kootenai 7.6% Elmore 12.1% Twin Falls 7.1% Bingham -2.7% Idaho 7.6% Canyon 7.2% Cassia -0.3% Bannock -3.7% Clearwater 3.3% Ada 4.5% Minidoka -2.7% Bear Lake -7.4% Butte -4.7% Bonneville -8.3% Madison -11.1% Caribou -13.0% Table 2. Change in median income from 1979 to 2000, in Idaho counties, by region. Northern region Western region Central region Eastern region Bonner 16.6% Payette 25.2% Blaine 52.4% Teton 51.7% Boundary 8.9% Washington 21.7% Lincoln 21.8% Oneida 31.4% Kootenai 8.3% Owyhee 18.5% Custer 21.4% Clark 25.3% Latah 4.9% Ada 16.3% Gooding 17.0% Jefferson 17.2% Nez Perce -0.1% Elmore 15.3% Camas 14.6% Franklin 9.6% Lewis -0.5% Canyon 12.9% Jerome 10.3% Fremont 9.5% Idaho -10.3% Gem 12.2% Cassia 5.4% Madison 9.5% Benewah -17.3% Boise 10.0% Lemhi 3.7% Bingham 2.5% Clearwater -17.8% Valley 1.8% Twin Falls 2.9% Bonneville 0.5% Shoshone -25.4% Adams -13.0% Butte 0.1% Caribou -3.4% Minidoka -4.7% Power -6.6% Bear Lake -8.9% Bannock -10.0% 5

6 area also known for resorts, celebrities, and expensive properties, experienced a 73% increase from $87,000 to $151,000 in median home values, and an annual growth rate of 2.8%. Many counties had double digit increases during this time, but as a whole, Idaho had an increase of about 11% in median home values over the 20-year period. Other counties experienced only single digit growth, or even lost value, after accounting for inflation. Counties experiencing below average increases in median home prices include metropolitan Ada County (4.5%), Canyon, and Kootenai. Among the eight Idaho counties experiencing a decline in real housing values over this 20-year period, Caribou County led, losing 13%. Table 1 conveys the total percentage changes from 1980 to 2000 for each county, by region. The eastern and central regions boast both the counties having the largest increases in home values and those experiencing losses in value. Income Looking at housing values without considering income might lead to inaccurate conclusions about affordability, because the equation also depends on the wage rates within each local area. We used the U.S. Census Bureau figures to assess Idaho counties median household income. The Census Bureau defines median household income as the level of income at which half of the population has lower income and half has higher income (see Data Definitions on page 4). The Census Bureau adjusts data for inflation. It represents real dollar spending power and may not reflect actual dollar amounts as expressed in other sources (see Appendix Table 1). In the 21-year 2 period from 1979 to 2000, real median household income in the U.S. increased from $44,786 to $47,624, a 6.3% increase. By comparison, Idaho real median household income rose from $41,122 to $43,018 a 4.6% increase. Blaine and Teton counties, which had the largest increase in median housing prices, also had the largest increase in median income. Several additional counties experienced large growth in median income, while nine counties dropped in median income during this time period. The majority of the counties seeing drops in household income were in rural and traditionally natural-resource-based economies. Closures and cutbacks in mining likely contributed to the largest decrease, in Shoshone County, where income fell by more than 25%. Table 2 shows the income changes over this period. HOUSING AFFORDABILITY INDEX A measure of housing affordability combines real median housing values and real median income levels of counties. The housing affordability index constructed summarizes the ability to pay and the housing cost in a single number. To calculate the housing affordability index for Idaho and its counties, we used median household income as defined by the Census Bureau and the median value of owner occupied housing as reported by the Census Bureau. The interest rate used is the effective interest rate reported by the Federal Housing Finance Board (See Data Definitions, page 4). The index model we employed in this bulletin was modeled after the Texas Housing Affordability Index, created and used by the Real Estate Center at Texas A&M University to study and measure housing affordability in Texas and throughout the nation. What does the Housing Affordability Index 3 measure? 1. General ability to qualify for a conventional mortgage on a median priced home. 2. General ability to manage monthly mortgage payments while continuing to meet other family expenses: For the median-income household For the median-priced house existing in the area Under conventional financing terms What does the Housing Affordability Index mean? An index of 1.0 means the median household income equals the income required by conventional lenders for the family to purchase the median-priced home. An index less than 1.0 means the median household income is insufficient to qualify for a median priced home loan. An index of greater than 1.0 means that median household income is more than enough to qualify for a medianpriced home loan. We used median household income and median house values to look at changes within the county over time. This allowed us to determine if housing in each individual county has become more or less affordable over time. The index also provides a standard of comparison, which allows cross-comparison of each county s affordability status and can be compared with state and national numbers. 6

7 Results Housing affordability in the U.S., according to the index, generally has improved since the 1980s. In 1980, the U.S. housing affordability index was 0.95, and the Idaho affordability Index was 0.91, indicating a general lack of affordability (see Appendix Table 2, Appendix Figure 1, and Figures 1A to 1C). In the 20 years from 1980 to 2000, the index indicates housing became very affordable from 1980 to 1990, then slowly began to become unaffordable again from 1990 to Over the 20-year period, housing generally has become more affordable in the U.S. By 2000, the index jumped to 1.25 and 1.28 in the U.S. and in Idaho, respectively. The real median income of U.S. and Idaho residents had increased compared with the level of income required to qualify for a conventional mortgage. In 1980, housing was less affordable for Ida- Figure 1A. Housing affordability index of least to most affordable counties: Idaho Blaine Madison Bonner Latah Kootenai Valley Custer Ada Teton Lemhi Boundary Canyon Washington Owyhee Payette Idaho Gem Elmore Jefferson Gooding Cassia Fremont Twin Falls US Boise Nez Perce Oneida Idaho County Franklin Jerome Bingham Bonneville Power Bannock Butte Lincoln Minidoka Caribou Camas Bear Lake Clark Lewis Adams Clearwater Benewah Shoshone 7

8 hoans than for the U.S. population in general; though by 2000, Idaho housing had become relatively more affordable. Assuming this trend continued to 2007 helps explain why Idaho housing has become more attractive to out-of-state investors, who effectively transfer their out-ofstate-level housing equity and income to Idaho s more affordable housing market. Figure 1B. Housing affordability index of least to most affordable counties: Idaho Blaine Madison Valley Bonner Latah Teton US Kootenai Washington Elmore Lemhi Ada Idaho Boise Boundary Canyon Nez Perce Jefferson Gem Twin Falls Payette Owyhee Bonneville Benewah Idaho County Gooding Custer Power Bannock Bingham Jerome Cassia Fremont Adams Oneida Lewis Franklin Clearwater Bear Lake Minidoka Lincoln Caribou Butte Shoshone Clark Camas 8

9 Figure 1C. Housing affordability index of least to most affordable counties: Idaho Blaine Valley Bonner Latah Teton Madison Boise Kootenai Boundary Lemhi Adams Idaho County Washington US Nez Perce Idaho Owyhee Gem Benewah Custer Twin Falls Canyon Ada Power Elmore Payette Franklin Jerome Oneida Gooding Cassia Bannock Camas Fremont Clearwater Lewis Shoshone Jefferson Bingham Minidoka Lincoln Bonneville Bear Lake Butte Caribou Clark 9

10 Time Snapshots Forty-three percent of Idaho counties recorded an affordability index greater than 1.0, meaning only 19 of Idaho s 44 counties had affordable housing (10 counties were barely above 1.0). Blaine County had the least affordable housing an index of 0.55 (see Figure 2A). Figure 2A. Annual housing cost as a percentage of annual median household income by county: Idaho 1980 (i=12.66%) i = interest rate 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Blaine Madison Bonner Latah Kootenai Valley Custer Ada Teton Lemhi Boundary Canyon Washington Owyhee Payette Idaho Gem Elmore Jefferson Gooding Cassia Fremont Twin Falls US Boise Nez Perce Oneida Idaho County Franklin Jerome Bingham Bonneville Power Bannock Butte Lincoln Minidoka Caribou Camas Bear Lake Clark Lewis Adams Clearwater Benewah Shoshone 10

11 Blaine County, having an index of 0.75, was the only county in the state where housing was unaffordable. Housing in Camas and Clark counties was the most affordable, having an index exceeding 2.0. In real terms, housing prices dropped by 20% from 1980 to Income also dropped but only by 3.3%. Housing generally became much more affordable during this time (see Figure 2B). Figure 2B. Annual housing cost as a percentage of annual median household income by county: Idaho 1990 (i=10.32%) i = interest rate 0% 5% 10% 15% 20% 25% 30% 35% 40% Blaine Madison Valley Bonner Latah Teton US Kootenai Washington Elmore Lemhi Ada Idaho Boise Boundary Canyon Nez Perce Jefferson Gem Twin Falls Payette Owyhee Bonneville Idaho County Benewah Gooding Custer Power Bannock Bingham Jerome Cassia Fremont Adams Oneida Lewis Franklin Clearwater Bear Lake Minidoka Lincoln Caribou Butte Shoshone Clark Camas 11

12 2000. Four counties, Blaine, Bonner, Latah, and Valley were unaffordable, having index numbers less than 1.0. The most affordable housing was in Bear Lake, Butte, Caribou, and Clark counties, where the index exceeded 1.67 (see Figure 2C). Figure 2C. Annual housing cost as a percentage of annual median household income by county: Idaho 2000 (i=7.88%) i = interest rate 0% 5% 10% 15% 20% 25% 30% 35% 40% Blaine Valley Bonner Latah Teton Madison Boise Kootenai Boundary Lemhi Adams Washington Idaho County US Nez Perce Idaho Owyhee Gem Benewah Custer Twin Falls Canyon Ada Power Elmore Payette Franklin Jerome Oneida Gooding Cassia Bannock Camas Fremont Clearwater Lewis Shoshone Jefferson Bingham Minidoka Lincoln Bonneville Bear Lake Butte Caribou Clark 12

13 Most Idaho counties switched from being unaffordable in 1980 to being affordable by Blaine County, however, has not had affordable housing in more than 26 years, while in the same period, Adams, Benewah, Clearwater, Shoshone, and Lewis counties never experienced unaffordable housing. Housing in Valley, Latah, and Bonner counties was unaffordable in 1980, became barely affordable by 1990, and became unaffordable again by Though not explicitly supported by our Census Bureau data, inferences drawn from the 20-year period 1980 to 2000, led us to assume that from 2001 to 2007 Idaho has experienced even more growth due to the attractive nature of the state and its housing market. In 2006, Idaho was the third fastest growing state in the U.S. in terms of population, according to recent Census Bureau estimates. It is likely Idaho s attractive communities and associated but isolated population increases have decreased the affordability of housing for the low to middle income wage earners in the unaffordable communities. For many Idaho counties, the growth in high-end housing has not been offset by growth in starter homes, those suitable for first-time home buyers earning low to median level incomes. Role of Home Prices in the Index A number of factors combined in the late 1990s to make homeownership even second homes a strategic investment for nearly all income brackets in the United States. Low interest rates and the decline of the stock market made real estate an especially attractive investment option. According to the Office of Federal Housing Enterprise Oversight, 4 housing appreciation steadily climbed in all markets throughout the beginning of the 21st Century. Probably due to rising interest rates, housing appreciation has slowed in most markets. However, according to the same source, Idaho led the nation in house price appreciation. While the housing market cooled in most markets in the second quarter of 2006, houses in Idaho appreciated at an average rate of 20.87%. During the same period, houses in California, a traditionally hot market, appreciated at a comparatively slower pace of 14.76%. Although the third quarter of 2006 saw the Idaho appreciation rate retract to 17.52%, the state still led the nation. California s rate for the same period was 10.16%. The question remains: How long will Idaho remain a sellers market, and how long can the state maintain rising housing prices coupled with relatively low wages? Role of Income Levels in the Index The differences in income across counties and other states pose a significant factor affecting housing affordability in a number of Idaho counties. Idaho is attractive to businesses and has attracted a number of companies to the state, yet median individual and family income remains behind those of the rest of the nation. In some counties, income falls far below the national median household income figures. The median household income in 2003 in Idaho was $42,309, ranking 34th among incomes of the 50 states. For the majority of Idaho counties, real median income (when adjusted for inflation) fell short of national levels in In Blaine County ($55,626 in 2003, $59,198 in 1999) and Teton County ($47,060 in 2003, $49,200 in 1999) median income exceeded the state median income (see Appendix Table 1). For most metropolitan counties in southern Idaho, incomes also exceeded the state median income. Ada county median household income ($52,443 in 2003, $54,091 in 1999) was the second highest in the state (behind Blaine County). Except for more rural Blaine and Teton counties, urban counties seemed to fare much better when comparing incomes with state and national median income figures. In Kootenai County, Idaho s northern urban county, the median income of $42,543 ($44,260 in 1999) kept pace with Idaho s median income. For other counties experiencing dramatic growth and increasing home prices, the picture was starkly different. In Bonner County, housing prices increased at a rate exceeded by only six other Idaho counties, 5 but the median income of $36,391 in 2003 ($38,456 in 1999), placed Bonner County 26th in median income among Idaho s 44 counties (see Appendix Table 1). Idaho individuals and families struggle to afford housing when incomes fall dramatically short of national and regional trends and housing prices continue to rise. Role of Interest Rates and Fees The index assumes a 30-year fixed-rate mortgage secured with 20% down, which translates into a loan amount of $96,456 for a median-valued house priced at $120,570 in Idaho in The total interest paid on this loan amount at 6.25% would be $117,346 over the life of the loan. Other fees are extra, especially at the time of the loan origination. Including interest and the base price of the home, the home buyer would, in essence, pay for nearly two homes. Excluding fees, the total price would be $237,916 for a $120,570 home. 13

14 Interest rates are key. A small difference of one-quarter percent in an interest rate, from 6% to 6.25% on a $100,000 loan, equals nearly $6,000 in additional interest payments, or a couple of months wages for a middleincome household. To further illustrate the impact of interest rate increases, assume that instead of the 5.74% interest rate in 2003, the prevailing interest rate had been 12.66%, as it was in In this scenario, housing would have become unaffordable in nearly every county in Idaho. Interest rates have been at near record lows for the past decade or so, otherwise housing affordability crises would certainly be more widespread throughout the state. Adding fees into the calculation of the effective interest rate increases the true cost of the loan. In a standard Truth-in-Lending disclosure statement provided to the borrower at the loan closing, the borrower can see the Annual Percentage Rate (APR), which includes the fees accompanying the loan. This is much like the effective interest rates discussed in Data Definitions on page 4, only on an individual level. In a conventional loan the additional fees increase the APR, add significantly to the costs, and reduce true affordability. BEYOND THE INDEX The housing affordability index can be a powerful tool, yet its data are limiting as a measure of housing affordability. Additional factors not necessarily reflected in the index scores can impact housing affordability. Nontraditional Lending To a growing degree, the primary assumption of the index, a 20% down, 30-year fixed-rate conventional mortgage has become less and less applicable to some home buyers. The deregulation of U.S. financial industries and the advent of the secondary market during the past 15 years gave birth to subprime lending, which generally refers to any nonconventional mortgage. Examples of nonconventional mortgage products include adjustable rate, balloon, and interest only mortgages. These loans are considered high cost loans by many standards. They feature rising rates, numerous extra fees, and often include massive payments, which can be met only through expensive refinancing options. More and more medium- to low-income households found the artificially low initial monthly payments of subprime loans presented an opportunity to buy more expensive homes than they could otherwise afford. However, the dream only lasted until the rates rose or the balloon payment came due, then the nightmare began. To add perspective, subprime home loans were virtually nonexistent 20 years ago, but in 2005 alone the volume of subprime home loan originations grew to more than half a trillion dollars. 6 In spite of the costs and risks, trends indicated more than one in five home-buying families would enter into a subprime loan in 2007, the majority being middle-income. Whether out of ignorance or perceived necessity, middle-income borrowers entered into non-traditional and subprime home loans in droves. 7 Subprime home lending products are seven times more prone to delinquency and foreclosure than traditional home loans. In addition to the astronomical fees and rates associated with these types of loans, subprime borrowers have even more wealth stripped during delinquency and foreclosure processes. Subprime borrowers often have been caught in continuous cycles of frequent refinancing attempts 8 to satisfy balloon payments and rising adjustable rates. All of these additional costs can be translated into a higher APR or effective interest rate, making housing even less affordable than the index might indicate. Personal Debt The index calculation assumed the absence of non-houserelated debt. For many households, especially first-time home buyers, this is rarely the case. Instead, households may have credit card debt, car payments, student loans, and other miscellaneous debts such as payday loans, financed furniture and appliance contracts. Established owners may have taken on second mortgages or other forms of home equity loans that further add to their debt ratios. The proliferation of creative types of credit made borrowing so easy, nearly anything could be purchased through financing of some sort. Owing more than $500 dollars in monthly non-houserelated debt payments would negatively affect the house price an average borrower could reasonably afford, according to standard back-end ratio guidelines. Traditional home lenders use front end/back end ratios to determine maximum housing affordability. These same guidelines state that no more than 36% of one s monthly income should be obligated to total debt, including a mortgage. Calculating true affordability requires accounting for a household s additional nonmortgage debts. According to the Federal Reserve s Survey of Consumer Finances, 9 in 1983, the median level of a U.S. household s non-houserelated debt was approximately $4,490; 10 in 2004, $17,700. According to the 2004 survey, 12% of debt-burdened households actually had an annual debt load exceeding 40% of annual income. These debt-burdened households were disproportionately low and moderate income. More than one out of five individuals making less than $40,000 carried a debt burden exceeding 40% of 14

15 annual income. By back-end ratio standards, more than one-fifth of low and moderate-income households were unable to afford a home because of household debt levels. Debt-ridden borrowers could still secure loans because nontraditional lending institutions felt little obligation to hold potential borrowers to standard guidelines. Income Volatility According to the Bureau of Labor Statistics, 11 about 45 million women over age 16 were in the labor force in By 2006, this number had grown to more than 70 million women, an increase of almost 10% of the female population. Not only have more women entered the workforce, but women work more hours and earn higher average real wages than their 1980 counterparts. Working women have significantly increased total household income over the past quarter-century. It is also more common in today s job market for both men and women to work more than one job, particularly in areas having higher costs of living. The increases in income from multiple jobs and dual earners have helped make housing more affordable on average. Although housing is technically affordable in these types of situations, affordability problems often occur after the purchase of a home. Dependence on two to four jobs between spouses, coupled with employment volatility, lack of emergency savings, 12 and increasing demands on time between work and family, makes periods of reduced income almost inevitable. 13 Housing initially deemed affordable, can become unaffordable at any given moment, sending the household into foreclosure 14 and even bankruptcy. 15 Starter Homes Housing affordability challenges for families and individuals trying to purchase a starter home in today s market often are met by a suitable housing scarcity. In many Idaho communities, housing markets have exploded in the last five to ten years, but much of the growth has been in highend housing. An alternative affordability measurement (see Table 3) incorporates current actual home prices and incomes for specific key occupations in today s market. People in key occupations are individuals and families with careers in occupations vital to the welfare of Idaho communities. Table 3. Starter home prices and income qualifications for selected Idaho communities, Required monthly Required income 2006 starter payment at 80% to qualify at Location home price loan to value %25 QR Ada Co. $291,000 1,433 68,803 Boise $277,300 1,366 65,564 Adams* $112, ,481 Bannock $171, ,501 Pocatello $167, ,650 Bear Lake Co.* NA NA NA Benewah $199, ,263 Bingham $188, ,450 Blackfoot $192, ,396 Blaine Co. $300,000 1,478 70,931 Bellevue* $388,000 1,911 91,737 Hailey* NA NA NA Ketchum* NA NA NA Boise $300,000 1,478 70,931 Bonner Co. $212,950 1,049 50,349 Sandpoint $217,560 1,072 51,439 Priest River $189, ,899 Bonneville Co. $164, ,775 Idaho Falls $161, ,208 Boundary $149, ,229 Butte $189, ,899 Camas Co. $189, ,899 Canyon $197, ,748 Caribou* $140, ,101 Cassia 0 0 Clark 0 0 Clearwater $119, ,224 Orofino $130, ,737 Custer Co. $125, ,732 Challis $147, ,756 Elmore Co. $147, ,756 Mountain Home 0 0 Franklin 0 0 Preston 0 0 Fremont* $189, ,686 Gem $172, ,773 Gooding Co. $166, ,390 Wendell $172, ,773 Gooding $154, ,624 Idaho County $151, ,820 Jefferson $181, ,913 Rigby $181, ,913 Jerome Co. $151, ,820 Kootenai $176, ,613 Coeur d'alene $175, ,595 Latah $179, ,428 Moscow $185, ,859 Lemhi Co.* $189, ,899 Salmon* 0 0 Lewis* NA NA NA Lincoln $130, ,737 Madison $190, ,923 Rexburg $190, ,923 Minidoka 0 0 Nez Perce $225,000 1,108 53,198 Lewiston $225,000 1,108 53,198 Oneida* $150, ,465 Owyhee $176, ,613 Payette Co. $149, ,263 Payette $161, ,066 Fruitland $143, ,861 Power* $190, ,923 Shoshone 0 0 Teton Co.* $280,000 1,379 66,202 Driggs* $280,000 1,379 66,202 Twin Falls Co. $163, ,539 Valley* $244,750 1,206 57,868 Washington 0 0 Interest rate: 6.25% *Indicates starter home availability is very limited or nonexistent 15

16 To further examine present housing affordability in Idaho, housing price data were gathered for starter homes in various counties and communities throughout the state. These home values have been derived with the help of several realtors and Multiple Listing Services. The standard starter home met the following requirements: Approximately 1,500 square feet Three bedrooms 1.5 to 2 baths Small yard Less than 10 years old 1- to 2-car garage Not a fixer-upper Table 3 illustrates the listing price of the starter home in several Idaho communities and shows the required household income and monthly payment needed to qualify for a conventional 30-year mortgage with a 20% down payment and a 6.25% interest rate. To qualify for the mortgage of such a home in Bellevue ($388,000), buyers need an income of $91,737 per year and will incur a mortgage payment of $1,911 per month. To qualify for the mortgage of a starter home in Adams County ($112,000), buyers would need an income of $26,481 per year. The mortgage payment would be $522 per month. Starter homes, as described by the above standards, are either limited or nonexistent in several communities where housing prices are extremely high. The data in Table 3 indicate more counties than originally listed in the affordability index are experiencing a crisis of housing affordability for middle-income workers. Research indicates an average size home has become much larger, having more bedrooms (3 to 4), more bathrooms (2.5), and more garage space (2-car), when compared with housing 20 years ago. Increased local government regulations have decreased affordability through impact fees, code restrictions, growth restrictions, and exclusionary zoning. Code restrictions have increased costs of rehabilitating older, more economical housing units. These units are either razed or remodeled to create new upper class communities. CONCLUSION WHAT CAN BE LEARNED The Idaho Housing Affordability Index explored in this bulletin provides a breakdown of affordability in every Idaho county at three separate points in time. This information can be valuable in helping county and city leaders understand the history of housing affordability in their area, and the implications of today s evolving housing market on local citizens. Lack of affordability, according to the index, is geographically isolated to specific areas. Housing affordability is likely more of an issue than the index might indicate. Today s economy has evolved greatly from its conditions. Relaxed lending standards, frequent refinancing of adjustable rate and balloon type mortgages, record-high debt levels, increased income volatility, and other factors have changed the applicability of the affordability index from to the present. Clearly miscellaneous factors such as debt, zoning restrictions, and creative financing influence housing affordability. The index introduced in this bulletin establishes important groundwork by accounting for several of the most influential variables in determining housing affordability: income, housing prices, and interest rates for a conventional mortgage. This pioneering effort provides a standardized measurement of housing affordability in Idaho. The index shows a handful of counties are experiencing housing affordability crises, and others are close behind. Future research should account for the impact of debt ratios and income volatility on the results of the index. This would be a step towards approaching housing affordability holistically. Increased bankruptcy rates and foreclosures in the state indicate many Idaho households are stretched thin not only in the housing market but also in other areas of consumer buying. Often these struggles are overlooked until they culminate in the finality of losing a home. Once new census data are available in 2010, an update can be made to the existing numbers discussed in this bulletin. 16

17 Endnotes 1. Base year of 1989 was used to adjust for inflation for all numbers used in calculations. The term real in this case refers to the adjusted numbers. 2. Because of data limitations the most accurate numbers on income from the U.S. census bureau were from 1979, 1989 and 2000, while the housing numbers were from 1980, 1990, and The authors felt the numbers are still representative of the time period being measured. 3. The Idaho Housing Affordability Index is modeled after the Texas Housing Affordability Index, created and used by the Real Estate Center at Texas A&M University. 4. Russell, C. and S. Mullin (2007). U.S. House Price Appreciation Steadies, Press Release. Retrieved March 29, 2007 from 5. Salant, P., C. Dearien, and D. Gray. University of Idaho. Northwest Area Foundation Indicators Website. (n.d). Retrieved January 2007, from 6. Joint Center for Housing Studies of Harvard University. (2006). The state of the nation s housing Retrieved March 8, 2007 from 006/son2006.pdf 11. Bureau of Labor Statistics (2006). Employment status of the civilian noninstitutional population 16 years and over by sex, 1971 to date. Retrieved on March 8, 2007, from ftp://ftp.bls.gov/pub/special.requests/lf/aat2.txt 12. Lown and Bhargava (2006). Preparedness for financial emergencies: Evidence from the Survey of Consumer Finances. Financial Counseling and Planning, 17(2): Warren, E. and A.W. Tyagi. (2003). The Two Income Trap. New York, NY: Basic Books. 14. Idaho ranks 14th in personal bankruptcy and 26th in foreclosure. American Bankruptcy Institute (2006). Household per consumer filing. Retrieved on March 8, 2007 from pdf. RealtyTrac (2006). National foreclosures inch up 2% in May. Retrieved on March 8, 2007 from realtytrac.com/contentmanagement/realtytraclibrary. aspx?&itemid=562&accnt= Sullivan, T. A., E. Warren, and J. L. Westbrook. (1989). As We Forgive Our Debtors. New York, NY: Oxford University Press. 16. Housing Education and Research Association. (2006). An Introduction to Housing. Upper Saddle River, NJ: Pearson Education Inc. 7. Lord, R. (2005). American nightmare: Predatory lending and the foreclosure of the American Dream. Monroe, ME: Common Courage. 8. Joint Center for Housing Studies of Harvard University. (2006). The state of the nation s housing Retrieved March 8, 2007 from 006/son2006.pdf 9. Avery, R.B. (1983). Survey of consumer finances. Retrieved on March 8, 2007 from and Bucks, B. K., A. B. Kennickell, and K. B. Moore. (2004). Recent changes in U.S. family finances: Evidence from the 2001 and 2004 survey of consumer finances. Retrieved on March 8, 2007 from financesurvey.pdf 10. Adjusted for inflation, reflected in 2004 dollars. 17

18 APPENDIX Appendix Table 1. Idaho median household income and median home value by county: ; ; Real Median Household Income (1989 dollars) Real Median Home Value (1990 dollars) Location US 44,786 47,340 47, , , ,655 Idaho 41,122 39,781 43, ,795 86, ,570 Ada 47,108 47,639 54, , , ,440 Adams 39,777 35,368 34,601 79,404 65, ,721 Bannock 46,968 41,384 42, ,951 79, ,082 Bear Lake 41,964 34,094 38,245 88,885 57,831 82,346 Benewah 45,669 33,876 37,759 82,959 66, ,947 Bingham 41,316 39,625 42,367 98,366 75,763 95,730 Blaine 39,301 49,140 59, , , ,569 Boise 41,773 41,027 45, ,714 89, ,914 Bonner 32,825 33,808 38, ,743 90, ,213 Bonneville 48,875 47,979 49, ,669 95, ,052 Boundary 33,519 34,119 36,500 92,677 73, ,908 Butte 36,562 41,411 36,592 81,774 61,866 77,922 Camas 35,510 38,494 40,711 77,745 53,049 97,998 Canyon 37,210 36,193 41, ,921 77, ,227 Caribou 47,579 47,218 45, ,766 72,027 91,193 Cassia 36,965 36,826 38,954 94,574 68,889 94,255 Clark 30,839 38,719 38,657 63,997 55,739 73,272 Clearwater 46,460 37,683 38,181 88,411 64,257 91,306 Custer 31,601 38,420 38,370 91,729 74, ,535 Elmore 35,908 37,407 41,415 94,337 86, ,711 Franklin 38,835 40,079 42,545 92,914 69, ,959 Fremont 35,523 37,011 38,896 90,544 69,038 93,235 Gem 35,903 33,856 40,293 94,574 69, ,702 Gooding 32,446 31,222 37,970 83,433 60,670 93,575 Idaho County 38,964 34,798 34,947 93,388 68, ,494 Jefferson 38,138 38,464 44,703 99,788 81, ,237 Jerome 37,081 33,405 40,891 88,648 62, ,855 Kootenai 40,769 40,310 44, ,572 96, ,222 Latah 37,732 35,651 39, ,513 94, ,368 Lemhi 33,662 31,024 34,893 93,388 70, ,783 Lewis 38,055 32,960 37,853 78,456 57,532 89,492 Lincoln 32,303 34,084 39,359 72,056 55,291 85,862 Madison 35,079 36,226 38, , , ,137 Minidoka 39,419 36,741 37,549 86,989 61,866 84,614 Nez Perce 42,674 39,721 42, ,610 84, ,003 Oneida 30,831 35,568 40,505 75,611 64, ,267 Owyhee 28,472 29,288 33,726 77,508 59,624 93,575 Payette 31,353 32,079 39,267 84,144 65,452 99,700 Power 42,195 39,016 39,402 98,840 75, ,947 Shoshone 45,410 33,045 33,865 69,449 48,566 79,624 Teton 31,114 35,910 47,190 87,463 88, ,854 Twin Falls 39,088 37,045 40,212 99,314 75, ,392 Valley 42,513 38,167 43, , , ,155 Washington 29,144 28,220 35,483 79,641 65, ,309 18

19 Appendix Table 2. Idaho housing affordability index of median household income and median home values: ; ; Appendix Figure 1. Idaho housing affordability index map, Location US Idaho Ada Adams Bannock Bear Lake Benewah Bingham Blaine Boise Bonner Bonneville Boundary Butte Camas Canyon Caribou Cassia Clark Clearwater Custer Elmore Franklin Fremont Gem Gooding Idaho County Jefferson Jerome Kootenai Latah Lemhi Lewis Lincoln Madison Minidoka Nez Perce Oneida Owyhee Payette Power Shoshone Teton Twin Falls Valley Washington Prepared by: UI Indicators Team Data Source: U.S. Census Prepared by: UI Indicators Team Data Source: U.S. Census 1980 Less than Greater than 1.5 Idaho =.91 U.S = Less than Greater than 1.5 Idaho = 1.32 U.S = Less than Greater than 1.5 Idaho = 1.28 U.S = 1.25 Prepared by: UI Indicators Team Data Source: U.S. Census 19

20 AUTHOR NOTES: Luke V. Erickson, Family Finance Extension Educator, University of Idaho, Madison County; Garth Taylor, Regional Economics Analyst, Department of Agricultural Economics and Rural Sociology, University of Idaho, Moscow; Benjamin Eborn, Agricultural and Community Development Extension Educator, University of Idaho, Teton County; Sarah Howe, Agricultural Economics and Community Development Extension Educator, University of Idaho, Boundary County; Sue Traver, Community Development Extension Educator, University of Idaho, Bonner County; Stephen Cooke, Associate Professor of Rural and Agricultural Development, Department of Agricultural Economics and Rural Sociology, University of Idaho, Moscow. Issued in furtherance of cooperative extension work in agriculture and home economics, Acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture, Charlotte V. Eberlein, Director of University of Idaho Extension, University of Idaho, Moscow, Idaho The University of Idaho provides equal opportunity in education and employment on the basis of race, color, national origin, religion, sex, sexual orientation, age, disability, or status as a disabled veteran or Vietnam-era veteran, as required by state and federal laws. Published March by the University of Idaho